After the subprime mortgage crash, FHA took on more lending with their FHA loan programs than any other type of home loan in the mortgage business.  FHA guidelines have always kept an open mind in that they look at the borrower rather just the borrower’s credit score.  This type of underwriting worked great when the FHA loans were performing, but as soon as FHA loan defaults rose to record levels in 2008 and 2009, something needed to be done to the FHA loan requirements to prevent the foreclosures and diminishing FHA reserves. 

HUD decided to raise the FHA requirements and make some other changes with FHA guidelines in an effort to prevent the bad mortgages that first the first time since 1934 put the government loan program in jeopardy.  The first change HUD made was to increase the down-payment requirements for home buying.  The new FHA loan requirement for a down-payment was raised to 3.5%.  HUD also limited FHA refinancing to 96.5% rather than 97%.  Then the government agency decided it was not fair to roll lending fees into the FHA streamline loans.  Next change came from FHA lenders who were starting to require higher credit scores.  One good thing HUD did in 2010 was to keep the FHA loan limits unchanged. 

We understand HUD’s moves to minimize the FHA loan defaults, but going away from the FHA credit guidelines and allowing FHA lenders to dictate higher credit scores may significantly reduce its appeal to home buyers and consumers looking to refinance into a more affordable fixed rate.  Credit scores can be very misleading and someone needs to give these borrowers another shot.

FHA refinance loans have helped out millions of homeowners lower their monthly mortgage payment with a fixed interest rate and no pre-payment penalty.  Even with having so many FHA loan success stories, it seems there are many unhappy mortgage brokers, borrowers and industry pundits that come off like FHA can’t do anything right.  There are several reasons why FHA has taken a lot of heat over the last year. 

1.  FHA loan defaults have risen dramatically over the last 48 months.

2.  FHA mortgage reserves have dropped to dangerously low levels.

3.  FHA guidelines have tightened significantly and most FHA lenders require a 640 credit score to refinance.

4.  The FHA requirements for FHA streamline programs thus fewer borrowers qualify.

5.  The change in the appraisal policy for FHA refinance loans has slowed the process and increased the closing costs for borrowers.

These 5 obstacles FHA has faced this year has brought forth new challenges for government refinance programs, but HUD maintains they are focused on improving FHA home loans for consumers, while increasing the accountability and FHA requirements for mortgage companies that offer FHA mortgage products. 

FHA mortgage rates remain low with the 30 year fixed available at 5% and the 5/1 ARM available at 4.125%.  The Federal Reserve left interest rates unchanged so FHA rates should continue their trend of affordability. For borrowers with less than perfect credit, FHA introduced a home loan that allows credit scores as low as 580, but requires a higher insurance premium with more equity or down-payment required.  FHA refinance applications dropped last month, but that doesn’t mean Americans won’t reconsider FHA if they loosen the FHA guidelines a bit while keeping the rates at record levels.

The government mortgage rules are changing for FHA refinance and home purchase programs.  The Federal Housing Administration announced tightening of FHA lending requirements to reduce risk and improve its reserves. The new FHA guideline changes include:

• Borrowers must pay an increased upfront mortgage insurance premium (MIP) of 2.25 % of the loan amount (increased by 50 basis points from 1.75 %). FHA has also requested legislative authority to increase the maximum annual MIP so it can reduce upfront costs for prospective home buyers.

• For borrowers with poor credit (credit score of below 580), they must make a minimum down payment of 10 % (up from 3.5 %).

• Seller credits for closing costs are cut by 50 % and cannot exceed 3 % of the purchase price.

• FHA will continue to increase enforcement on FHA-approved lenders, and will publicly report lender performance rankings to improve transparency and accountability.

With the current recessionary economic state, constricting mortgage availability, and general credit crunch, FHA loans have exploded, with projections of hitting $400 Billion in 2010. FHA loans, featuring low down payments, competitive interest rates, and more forgiving credit requirements, have proven the loan of choice for many first time home buyers and those with marginal credit scores.

FHA loan defaults hit record highs this year while FHA rates hit record lows in 2009.  Loan defaults is a major reason why is HUD going to change FHA requirements in 2010.  According to a senior HUD official there are a few FHA guideline changes under consideration:

1. Minimum down payment will rise. Currently, you only need a 3.5% cash down payment to obtain FHA financing. Legislation has been proposed that would increase this to 5 %, which is the minimum down payment amount required on most conventional financing.
2. Minimum credit score for FHA loans will rise. A few years ago, you could get an FHA loan with a credit score of 500.  Today, most FHA lenders require you have a credit score of at least 640. This could rise even higher as FHA seeks to upgrade its borrower profile, eliminating loan opportunities for first-time home buyers with thin credit or lower credit scores.
3. FHA mortgage insurance premiums will rise. Although FHA mortgage insurance premiums rose in 2009, expect them to rise again in 2010, as FHA seeks to replenish its coffers.
4. Seller’s will be able to give buyers less money. Right now, FHA allows sellers to kick in up to 6 % to cover a home-buyers’ closing costs and other lending fees. FHA will likely lower this to 3%.
5. Kicking out abusive lenders. FHA has moved swiftly to end relationships with several lenders, including Taylor, Bean and Whitaker Mortgage Company.
6. Increasing lenders’ minimum reserves. Currently, FHA requires that lenders have only $250,000 in reserves to use to repay FHA in case of mortgage fraud. FHA is considering raising that amount to $2.5 million. That move will likely limit the number of mortgage brokers who are able to do FHA loans.

Don’t categorize FHA home loans in the subprime lending section. The credit score averages for FHA loans suggest just the opposite.  HUD released new credit score data figures indicating that the average FHA customer has a credit score of 670. HUD clearly releases the credit score information because it wants to show Wall Street and the mortgage insurance companies that thetypical borrowers for FHA mortgage loans is qualified for home financing.  FHA loans still have no credit score minimums.

According to HUD, FHA guidelines still “do not have minimum credit score requirements.” However HUD does stipulate that past credit history is considered when underwriting FHA home loans.  FHA guidelines are based on the borrower’s ability and willingness to repay the mortgage loan.  “FHA lenders are empowered to make a credit determination based on the merits of each borrower.”  FHA lenders have the ability to disregard low credit scores if the borrower demonstrates significant compensating factors that outweigh the bad credit.  Do wholesale FHA lenders like B of A, Wells Fargo, Countrywide, Chase or SunTrust ignore credit scores and extend no credit requirements to brokers and loan officers?  NO –That is the myth…HUD does not have minimum credit score requirements but most FHA lenders have implemented their own credit score minimums in an effort to mitigate risks and reduce default ratios.  In most cases, if a borrower has a FICO score below 500 than the FHA underwriter typically requests an additional 10% of home equity or for a down-payment to show the applicant’s compensating factors.

o    Credit Score Average for FHA Loans is 670

o    Average Credit Score for Home Buying is 695

o    Credit Score Average for FHA Refinancing is 662

Expanded opportunities for Fannie Mae to Fannie Mae refinance loans through Refinance Plus (manual underwriting) and DU Refi Plus.  A new solution for borrowers with LTVs above 8% who currently may not be able to refinance because of existing MI coverage requirement.

Loan To Values’ up to 105% on the new loan and additional underwriting flexibilities.  See FHA loan Announcements 09-04 and 09-13, the FAQs document, and other mortgage resources provided via the links below for details on Fannie Mae’s refinance effort.

Flexible MI Requirements to Assist Borrowers with Home Price Declines:  Fannie Mae’s regulator, the Federal Housing Finance Agency (FHFA), has authorized us to provide refinancing opportunities for loans we currently hold or have guaranteed with current LTVs up to 105%, with specific flexibility regarding MI coverage for FHA loans with LTVs above 80 %.

The following general guidelines apply: For existing FHA loans with original LTV ratios at or below 80% and no existing MI coverage, the new refinanced loan does not require MI coverage.

For existing FHA home loans with original LTV ratios over 80% that currently have MI coverage in force, the new refinance requires the level of insurance coverage in force on the existing loan or our standard level of insurance coverage. The FHA mortgage lender is encouraged to use its best efforts to obtain MI coverage that provides the lowest cost option available to the borrower.

For existing mortgage loans with original LTV ratios over 80% that do not have MI currently in force due to prior cancellation or termination in accordance with the Selling Guide or the Servicing Guide, the new refinance does not require MI coverage.

See FHFA’s Statement on Fannie Mae and Freddie Mac Refinance Initiatives available at the link below for details on this new authority

Refinance Plus (Manual Underwriting)

Refi Plus simplifies the process of refinancing loans that are already in a lender’s servicing portfolio. This product supports the new 105 % maximum LTV and MI flexibilities for LTVs over 80 %.

DU Refinance Plus

DU Refinance Plus provides increased efficiencies for the origination and underwriting of Fannie Mae to Fannie Mae limited cash-out refinance transactions in DU. Eligible loans identified in DU receive increased underwriting flexibilities, including expanded eligibility criteria and DU minimum documentation requirements.

The DU Version 7.1 April Update release and May Update release will implement these underwriting flexibilities. Release Notes and FAQs for the May Update release (implementing the weekend of May 2, 2009) and updated Release Notes for the April Update release are now available. See the DU Release Notes page on eFannieMae.com for details (available at the link below).

The importance and value of FHA loans in the mortgage industry and real estate market should not be overlooked as HUD’s mortgages have helped finance America during some tough times. In 2006, FHA’s share of the purchase market had fallen to less than 4%.  Then the subprime mortgage crisis arose as borrowers began to default at great numbers.  The foreclosure crisis followed which caused the real estate market to crash nationwide. As a result, the financial crisis arose and that has our economy wondering when the housing market will bottom out.  With home prices declining and defaults rising, the subprime market largely disappeared; option ARMs declined to a trickle; and documentation requirements on prime conventional loans were substantially tightened. In addition, FHA home loan limits were raised materially in 2008, and again in 2009. In early 2009, FHA’s market share of new purchases was back to about 15 %, and its share of refinances was substantially higher.

The FHA Home Loan Benefits:

o    FHA mortgage loan limits: The FHA loan limits on FHAs effective until year-end 2009, established on a county basis, were the same as those applicable to Freddie Mac and Fannie Mae. On a single-family house, they ranged from $271,050 to $729,750 in 76 higher-price counties.

o    Down-payment requirements: In 2009, FHA’s 3.5% down payment compared with 5 % to 10 % on most conventional loan programs. Zero-down loans, which were widely available in the conventional sector during the dodgy years of 2000-2006, have largely evaporated. The only generally available zero-down loans are VA mortgages for military home financing.

o    Underwriting requirements: FHA accepts lower credit scores than are allowed with “A-paper” conventional mortgages and in most cases FHA loans are more forgiving of past credit blemishes like collections, charge-offs and delinquencies. FHA underwriting will allow a bankruptcy after only 2 years and a foreclosure after 3 years with strong compensating factors.

o    Mortgage insurance: FHA borrowers pay a monthly mortgage insurance premium of 0.5 % per year

Compare FHA mortgage rates and lender costs: Consumers are now in a great position to shop and compare FHA and conventional mortgages for refinance or home-buying.  We suggest analyzing 3 loan offers from different lenders or brokers.  Compare interest rates, loan amounts, origination fees, discount fees, processing fees, underwriting fees and the appraisal fees. Don’t forget that with FHA refinance loans all cash out transactions above 85% Loan to Value now require 2 appraisals from FHA licensed appraisers.  Don’t forget to factor in the upfront mortgage insurance premium, with FHA mortgage loans.